Trading in the volatile month of October came to a close on Friday as new evidence continues to emerge pointing to recessionary conditions in many western nations. The Bank of Japan followed the lead of central banks around the world with its own 20 basis point cut in the borrowing rate, reducing that country's overnight rate to only 0.3%. WTI crude oil continued to pull back from the $70 level as the continuing economic turmoil leads many traders to position themselves for further moves lower in what remains of calendar year 2008.
Producer hedgers continue to look for cheap downside strategies. Using Average Price Options (Asians), the WTI December 2008 $60 puts are trading around only $3.25. That's $3,250 of total premium at risk to be short from the $60 level for the next 60 days. This simple strategy allows unlimited downside protection without the margin calls and volatile daily swings of trading flat price. The long put can be made costless (meaning the hedger need only post margin) by selling the December $80 call. This trade puts zero premium at risk at or below $80.
Singapore, 12:47
Sunday, November 2, 2008
Thursday, October 30, 2008
Rally Proves Short-lived
WTI crude oil fell back yesterday in a much-expected retreat from the $70 level as producer cuts and consumer demand destruction rightfully returned to traders' focus. Medium-term market fundamentals point to slower growth in the global economy, reinforcing the recent bearish pressure on energy markets. The 2-day rally in both equity and commodity markets sparked by the highly anticipated US Fed's 0.5% rate cut was of course short-lived.
Implied volatility remains elevated but downside bargains still exist in the form of cheap put spreads and zero-cost 3-ways. Using Average Price Options (Asians), the WTI December 2008 $50/60 put spread is currently trading around $2.50. That's only $2,500 of maximum risk per 1000bbls of crude oil with a potential payout of $7,500. The potential payout can be raised to $10,000 by selling the December $82 call. This 3-way has zero premium at risk at or below $82 and would provide substantial downside protection if crude were to test the $60 level in the next few weeks.
Singapore, 08:50
Implied volatility remains elevated but downside bargains still exist in the form of cheap put spreads and zero-cost 3-ways. Using Average Price Options (Asians), the WTI December 2008 $50/60 put spread is currently trading around $2.50. That's only $2,500 of maximum risk per 1000bbls of crude oil with a potential payout of $7,500. The potential payout can be raised to $10,000 by selling the December $82 call. This 3-way has zero premium at risk at or below $82 and would provide substantial downside protection if crude were to test the $60 level in the next few weeks.
Singapore, 08:50
Wednesday, October 29, 2008
CME/NYMEX Adds Gasoil, Fuel Oil & JetKero Options to its List of Cleared Products
*** CME/NYMEX will be launching Gasoil options (Asian, American & European style) on Clearport this weekend. Hudson Capital Energy will be making markets and providing liquidity and hedging strategies on these options 24hours/day with our offices in Singapore and NY shortly. Fuel Oil and JetKero options will also follow within a few weeks.
Commodity and equity markets reacted swiftly yesterday to the US Federal Reserve lowering interest rates half a point to 1%. However, the sharp move higher may soon prove fleeting as the move by the Fed is seen as largely symbolic and will have little to no effect on the global economic slowdown and the resulting drop in demand for raw materials. WTI crude oil pushed towards $70 before backing off to below $68.
Implied volatility softened in early trading yesterday, allowing downside producer hedgers several compelling reasons to re-enter the market. As the crude price rallies, long put strategies will of course become cheaper. Second, with implied volatility softening, option premiums will decrease even further. In early Asian trading this morning, the WTI December 2008 $65/45 put spread was offered at $4.25. The put spread was also quoted against the December $90 calls. This 3-way enables the downside or bearish hedger to purchase the $65/45 put spread and sell the $90 call while only putting $2.00 of premium at risk. That's a maximum loss of only $2,000 should crude oil stay below $90 and above $65 in December. Max gain on the trade would be $18,000 per contract.
Singapore, 08:30
Commodity and equity markets reacted swiftly yesterday to the US Federal Reserve lowering interest rates half a point to 1%. However, the sharp move higher may soon prove fleeting as the move by the Fed is seen as largely symbolic and will have little to no effect on the global economic slowdown and the resulting drop in demand for raw materials. WTI crude oil pushed towards $70 before backing off to below $68.
Implied volatility softened in early trading yesterday, allowing downside producer hedgers several compelling reasons to re-enter the market. As the crude price rallies, long put strategies will of course become cheaper. Second, with implied volatility softening, option premiums will decrease even further. In early Asian trading this morning, the WTI December 2008 $65/45 put spread was offered at $4.25. The put spread was also quoted against the December $90 calls. This 3-way enables the downside or bearish hedger to purchase the $65/45 put spread and sell the $90 call while only putting $2.00 of premium at risk. That's a maximum loss of only $2,000 should crude oil stay below $90 and above $65 in December. Max gain on the trade would be $18,000 per contract.
Singapore, 08:30
Expected Fed rate cut and bullish stats
A solid rally in all energy products followed the Wednesday stats, which were slightly more bullish than expected. The market also is digesting the likelihood of OPEC taking more aggressive action in the near future. We know that we have cracked some higher cost producers threshold levels, which indicates some supply tightening in addition to OPEC. That said, some fresh data is pointing to lower demand which has led the market over the last few weeks. Volatility in crude oil has come in sharply with this rally, providing an opportunity to buy puts for those who remain bearish near-term. The Dec American $60 Put was offered $2.10/bbl, providing reasonable insurance for the next month. The costless crude collar was offered with the $60 put financed by the $76 call.
Consumers have been aggressively looking to hedge consumption for 2009 and also 2010. The call spread strategy remains attractive as volatility has yet to subside. The Fed rate cut was expected and the US equity markets appeared equally uncertain on the close.
New York, 5pm EST
Consumers have been aggressively looking to hedge consumption for 2009 and also 2010. The call spread strategy remains attractive as volatility has yet to subside. The Fed rate cut was expected and the US equity markets appeared equally uncertain on the close.
New York, 5pm EST
Tuesday, October 28, 2008
Crude Rally Presents Producer Hedge Opportunities
Energy markets began yesterday by following equities higher but the rally proved to be short-lived as demand fears outweighed positive investor sentiment. The pessimistic near-term outlook of 6-12 months for crude demand reflects widespread fears of a worldwide economic recession, further compressing already weak demand. Yesterday's move higher resulted in implied volatility staying at already inflated levels.
December WTI crude managed to push back above $65 in early Asian trading, presenting many bargain opportunities for downside hedgers. Using Average Price Options, the December 2008 $40/60 put spread is currently trading around $3.75. That's $3,750 of total premium at risk to short crude oil from $65. Any move lower in the next few days would produce quick profits for this protection strategy, while holding it until expiration at the end of December could see a maximum profit of $16,250 with only $3,750 at risk. The strategy can be combined with the sale of the December $78 call to make the entire structure Zero Cost.
Singapore, 08:30
December WTI crude managed to push back above $65 in early Asian trading, presenting many bargain opportunities for downside hedgers. Using Average Price Options, the December 2008 $40/60 put spread is currently trading around $3.75. That's $3,750 of total premium at risk to short crude oil from $65. Any move lower in the next few days would produce quick profits for this protection strategy, while holding it until expiration at the end of December could see a maximum profit of $16,250 with only $3,750 at risk. The strategy can be combined with the sale of the December $78 call to make the entire structure Zero Cost.
Singapore, 08:30
Monday, October 27, 2008
Traders Focus on Lack of Demand
WTI December crude pushed closer to $60 yesterday as traders choose to ignore Opec's production cuts and focus instead on the continuing drop-off in demand. As winter quickly approaches, many refineries continue to scale-back production. The drop in crude prices as well as the sharp and sustained increase in implied volatility is mirrored closely by global equity markets, particularly the S&P500 which has shown a high correlation as of late with the price of crude oil. In the U.S., the ViX (volatility index) has seen a similar sharp and sustained increase in volatility.
Despite the seemingly bottomless pit energy markets appear to have fallen into, consumer hedgers have been entering the market lately to lock in lows not seen in almost a full year. In the Singapore Fuel Oil 180CST market, December 2008 is currently trading around $310. This represents lows not seen since early 2007. However, with the continued volatilty the market has witnessed, just buying swaps means taking on an enormous amount of downside risk on a daily basis. Combining the FO swaps buy with the purchase of the WTI Average Price November $55 puts for only about $1.50 would put a floor in the hedgers losses while still allowing for unlimited profits on the upside.
FYI: Last week's recommendation to buy the November $65 puts as downside protection against any Fuel Oil swaps purchase would have saved the hedger more than $125,000 on a 1:1 basis.
Singapore, 08:30
Despite the seemingly bottomless pit energy markets appear to have fallen into, consumer hedgers have been entering the market lately to lock in lows not seen in almost a full year. In the Singapore Fuel Oil 180CST market, December 2008 is currently trading around $310. This represents lows not seen since early 2007. However, with the continued volatilty the market has witnessed, just buying swaps means taking on an enormous amount of downside risk on a daily basis. Combining the FO swaps buy with the purchase of the WTI Average Price November $55 puts for only about $1.50 would put a floor in the hedgers losses while still allowing for unlimited profits on the upside.
FYI: Last week's recommendation to buy the November $65 puts as downside protection against any Fuel Oil swaps purchase would have saved the hedger more than $125,000 on a 1:1 basis.
Singapore, 08:30
Thursday, October 23, 2008
All Eyes on Opec
Oil markets traded within a relatively tight band yesterday as all eyes are on Opec's emergency meeting today. Traders and analysts are almost unanimously predicting the cartel will announce a further production cut; most estimate between 1-1.5m barrels per day while many expect the cut to be closer to the 2m barrel level. Opec has a second meeting planned for December where further cuts can be made, once the market has had time to absorb any cuts announced today. Regardless of the announcement, volatility will certainly continue in the near-term, thus option protection strategies are the most sensible.
Traders and hedgers have been entering the market within the past week to buy downside protection in the form of cheap puts. While the value of these options has increased substantially, cheap protection strategies still abound. The November through December $65/50 put spread strip is currently trading around $3.00 using Average Price Options. That's $3,000 of maximum loss potential for $12,000 of protection per month below $65. This strategy helps the hedger avoid paying a large premium for downside protection while still locking in protection to the $50 level.
Singapore, 08:15
Traders and hedgers have been entering the market within the past week to buy downside protection in the form of cheap puts. While the value of these options has increased substantially, cheap protection strategies still abound. The November through December $65/50 put spread strip is currently trading around $3.00 using Average Price Options. That's $3,000 of maximum loss potential for $12,000 of protection per month below $65. This strategy helps the hedger avoid paying a large premium for downside protection while still locking in protection to the $50 level.
Singapore, 08:15
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